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DATE
Monday, Aug. 25, 2025 at 4:30 p.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Hong Hou
Executive Vice President and Chief Financial Officer — Mark Lin
Vice President, Investor Relations — Mitch Haws
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RISKS
Goodwill Impairment— Mark Lin reported a noncash $41.9 million goodwill impairment charge in the connected services business for fiscal Q2 2026 (GAAP), attributed to results that did not meet internal earnings forecasts.
Gross Margin Headwinds— Mark Lin noted a modest negative impact to adjusted gross margin (non-GAAP) from higher high-end consumer sales in the product mix for fiscal Q2 2026, as well as a Signal Integrity product mix impacted by increased telecommunications products and a forecasted decline in corporate revenue.
Sequential LoRa Softness— Within the industrial segment, LoRa-enabled solution sales decreased by 5% sequentially in fiscal Q2 2026.
TAKEAWAYS
Net Sales-- $257.6 million, a record for the quarter, up 20% year over year and marking the sixth consecutive quarter of growth.
Adjusted Gross Margin-- 53.2% adjusted gross margin for fiscal Q2 2026 (non-GAAP), down 30 basis points sequentially but up 280 basis points year over year, exceeding internal guidance midpoint.
Infrastructure Net Sales-- $73.4 million, up 1% sequentially and 39% year over year, with data center revenue (non-GAAP) at $52.2 million for fiscal Q2 2026, a record, rising 1% sequentially and 92% year over year in fiscal Q2 2026 (non-GAAP).
High-End Consumer Net Sales-- $41.2 million, up 16% sequentially and 11% year over year, with TVS (non-GAAP) at $29.9 million for fiscal Q2 2026, up 22% sequentially and 15% year over year.
Industrial Net Sales-- $143 million, up slightly sequentially and 14% year over year.
LoRa-Enabled Solutions-- $36.9 million in LoRa-enabled solutions sales for fiscal Q2 2026, down 5% sequentially but up 29% year over year; the company expects quarterly LoRa revenues of $30 million-$40 million going forward (non-GAAP).
IoT Systems Hardware Net Sales-- $64.8 million, up 2% sequentially and 24% year over year (non-GAAP), with bookings up more than 40% year over year for fiscal Q2 2026.
Adjusted Operating Income-- $48.6 million, yielding an adjusted operating margin of 18.8% for fiscal Q2 2026 (non-GAAP), up 460 basis points year over year.
Adjusted EBITDA-- $56.5 million, up 39% year over year, with an adjusted EBITDA margin of 21.9%, up 310 basis points year over year for fiscal Q2 2026.
Adjusted Diluted EPS-- $0.41, up from $0.38 in Q1 and $0.11 in fiscal Q2 2025.
Operating Cash Flow-- $44.4 million, up 60% sequentially from $27.8 million in Q1, up from negative $5 million in fiscal Q2 2025.
Free Cash Flow-- $41.5 million, up 59% sequentially from $26.2 million CAD, up from negative $8.4 million in fiscal Q2 2025.
Net Debt-- Reduced by $37.1 million sequentially to $359.1 million at the end of fiscal Q2 2026, with adjusted net leverage ratio improved to 1.6 times from 1.9 times sequentially and 8.8 times year over year as of the close of fiscal Q2 2026.
Adjusted Net Interest Expense-- $4.1 million adjusted net interest expense for fiscal Q2 2026, down 80% year over year and sequentially from $5 million, due to use of free cash flow for debt repayment.
Q3 2026 Outlook-- Net sales (non-GAAP) expected at $266 million plus or minus $5 million for fiscal Q3 2026, up 12% year over year, adjusted gross margin (non-GAAP) at 53% plus or minus 50 basis points for Q3, adjusted operating margin at 19.6% in fiscal Q3 2026, and adjusted EBITDA at $60 million plus or minus $3 million in fiscal Q3 2026.
Data Center Demand-- Management expects continued multiyear growth with new customer bookings accelerating, especially in North America, and volume ramps for 1.6 terabit solutions beginning in calendar year 2026.
LPO Design Wins-- The company has secured multiple design wins with top hyperscalers (two in the US, one in China) for 800 gig LPO solutions, with revenues expected to begin ramping in Q4 2025, with revenue (non-GAAP) expected to begin ramping in Q4 of calendar year 2025.
ACC Cable Opportunity-- ACC product launches are expected in Q4 2025 and into calendar year 2026, with customer demand for both 800 gig (100 gig per lane) and 1.6 terabit (200 gig per lane) applications.
R&D Investment-- Management increased investment in a core area by 20% sequentially while maintaining profitability.
SUMMARY
Management emphasized a shift from an adjusted net leverage ratio of 8.8 times in fiscal Q2 2025 to 1.6 times in fiscal Q2 2026, driven by $879 million in debt reduction as of fiscal Q2 2026 and an 80% decrease in quarterly interest expense year over year. The company highlighted securing "the lion's shares of the TIAs in the most optical transceivers" and believes its 800 gig LPO laser driver is "the only compliant driver in the market." Recent design wins in LPO and ACC products positionSemtech(SMTC -0.18%) for incremental revenue growth in infrastructure, with deployment ramps beginning in Q4 2025 and accelerating in calendar year 2026. Digital sensing technology (PERSE) is seeing expanding adoption in both smart glasses and major smartphone platforms, which management described as a "pretty sizable market" opportunity.
Management commented that industrial segment bookings remain strong due to both market recovery and growing IoT platform demand, with rising design wins and increased 5G adoption.
President Hou stated, "we are well-positioned to further transform Semtech into a higher growth and more profitable company," citing portfolio optimization and core asset delineation.
The company expects seasonality in high-end consumer in fiscal Q4 2026 but views industrial and infrastructure segments as key growth drivers moving forward.
Hong Hou said, "LPO transition into taking over some of the DSP-based transceiver market share is inevitable," positioning Semtech to benefit whether deployments favor traditional DSP or LPO architectures.
INDUSTRY GLOSSARY
LPO (Linear-drive Pluggable Optics): Optical transceiver architecture reducing power consumption and cost by eliminating digital signal processing for certain links.
ACC (Active Copper Cable): High-speed copper interconnect with integrated signal amplification and equalization to extend range and reduce latency in data centers.
TIA (Transimpedance Amplifier): Analog front-end component for optical receivers, converting low-level photo currents to measurable voltage signals in optical modules.
PERSE: Semtech's proprietary proximity and gesture sensing technology for smart devices, enabling intelligent power management and regulatory compliance.
TVS (Transient Voltage Suppression): Semiconductor protection device safeguarding electronic circuits from voltage spikes.
PMD (Physical Media Device): Module responsible for managing data transmission between the physical transceiver and network components.
DSP (Digital Signal Processor): Specialized microprocessor for real-time processing of digital signals in networking and communications equipment.
Full Conference Call Transcript
Hong Hou, our President and Chief Executive Officer, and Mark Lin, our Executive Vice President and Chief Financial Officer. Before we begin the prepared remarks, I would like to highlight upcoming investor events including the Deutsche Bank Technology Conference on August 27, the Benchmark TMT Conference on September 3, the JPMorgan Rising Tech Leaders Forum on September 4, and the Piper Sandler Growth Frontiers Conference on September 10. Today after market close, we released the run out results for 2026, which are posted along with an earnings call presentation to our Investor Relations website at investors.semtech.com. Today's call will include various remarks about future expectations, plans, and prospects, which comprise forward-looking statements.
Please refer to today's press release and Slide two of the earnings presentation as well as the risk factors section of our most recent annual report on Form 10-Ks. A number of risk factors could cause our actual results and events to differ materially from those anticipated or projected on this call. You should consider these risk factors in conjunction with our forward-looking statements. We will refer primarily to non-GAAP financial measures during today's call. Please see today's press release and slide three of the earnings presentation for important information regarding notes on our non-GAAP financial presentation. The press release and earnings presentation also include reconciliations of our GAAP and non-GAAP financial measures.
With that, I will turn the call over to Hong.
Hong Hou: Thank you, Mitch. And good afternoon to all of you joining today. The Semtech team made solid progress again this quarter, with sequential increases across each end market leading to record net sales. We also delivered sequential improvement in adjusted gross profit, operating income, and earnings per share, strengthening our financial profile while executing on the R&D roadmap that we believe establishes a foundation for long-term growth. I completed my one-year tenure as Semtech CEO, and reflecting on the three priorities I outlined in our earnings call a year ago, we have made tremendous progress.
First, on strengthening the balance sheet, at the end of Q2, we have reduced debt by $879 million from the time I started as CEO, resulting in a year-over-year quarterly interest expense reduction of 80% and a substantial net leverage ratio improvement to 1.6 times at the close of Q2 2026 compared to 8.8 times a year ago. This strong improvement to our financial foundation allowed us to focus on growth drivers for our business. Second, on rationalizing the portfolio and increasing investment in the core assets, I am happy to report that the core assets we have delineated, namely data center, LoRa, and the PERSE, each strongly contributed to our net sales momentum throughout the year.
With the increased R&D investments into these core areas, we anticipate further acceleration of our momentum. Third, revitalizing our winning culture. This is an area of progress of which I am most proud. By strong engagement with the employees through frequent site visits, interactive information sessions, small group, and one-on-one meetings, as well as regular and transparent communications, we provided much-needed clarity in the company's vision, strategy, and priorities following a call to action. By instilling a culture of customer intimacy, operational discipline, and a strong excuse, we believe we have made great progress on achieving roadmap alignments with our key customers through significantly improved customer engagement, securing new product design wins, and delivering strong financial performance.
I'd like to extend my sincere gratitude to the senior leadership and all of our fellow employees for their resilience, dedication, and commitment to Semtech's rising initiative. Going forward, the priority of portfolio optimization is further elevated. We have managed our non-core assets back to a growth trajectory, and combined with the market tailwinds, we believe this asset represents a very compelling business to the right shooter. We believe we are well-positioned to further transform Semtech into a higher growth and more profitable company. Now let me move the discussions to our end market. For Q2, infrastructure net sales were $73.4 million, up 1% sequentially and up 39% year over year.
Infrastructure revenue growth benefited from record revenues in our data center business. Net sales for data center reached a record of $52.2 million, up 1% sequentially and up 92% year over year, benefiting from our broad portfolio. CyberEdge products achieved record net sales, offsetting the copper edge air pocket from the initial rack deployment at our end customer. Based on Q2 performance, we expect continued strong opportunities for fiber edge demand for the remainder of calendar year 2025 and beyond from our optical module customers serving North America cloud service providers or CSPs. This conviction is supported by our direct ecosystem engagement, which correlates with the increases in the data center CapEx forecast from multiple hyperscalers, seven operators, and enterprises.
During Q2, bookings and forecasts from our optical module customers serving China-based CSPs were generally cautious due to limits on GPU availability. That said, we have started seeing accelerated data center bookings over the past several weeks for this market. Looking ahead to the next several quarters, we expect the data center market to continue its multiyear growth cycle. The market is shifting to higher data rates to support increased compute and network interconnect bandwidth, resulting in strong demand for fiber edge 800 gig TIAs moving rapidly from 400 gig. Beyond 800 gig, we are supporting multiple customers on their 1.6 designs, with both TIAs and drivers.
We currently expect the volume ramps to start in 2026, commensurate with the deployment of 1.6 T switches. While the shift to higher speed to achieve high bandwidth is a given, it is increasingly important to deliver this bandwidth using low power and a low latency network interconnect. Semtech's analog expertise allows CSPs to deliver high-performance compute and increase the storage capacity while constraining our budget for networking. From the optical side, we have secured several LPO design wins without TIAs in 400 gig and 800 gig transceivers. We believe we have secured the lion's shares of the TIAs in the most optical transceivers.
Our 800 gig LPO laser drivers were specifically designed to comply with our LPO MSA requirements, and we believe it is the only compliant driver in the market. Several optical module customers are conducting design in and testing of our drivers on their transceivers. We are engaged with three of the leading hyperscalers with our 800 gig LPO solution and expect revenues to begin ramping in Q4 of this year. We are accelerating our R&D roadmap and are targeting making 1.6 LPO drivers and TIAs available for sampling before the end of the year. Another high bandwidth and low power is a copper edge for ACC and onboard leading equalizer.
During the quarter, we delivered 800 gig and 1.6 g ACC cables to multiple hyperscaler and enterprise customers for testing and qualification. Those customers are seeing benefits of strong signal integrity, lower latency, and importantly, much lower power consumption, as much as 90% below competing DSP-based AEC while offering lighter and more flexible cables as well as a significantly longer reach compared to direct attached copper cables. We continue close engagement with our entry customer for their future RAC platforms using CopperEdge then 1.6 optical transceivers using our FiberEdge product. We are on track and expect to launch ACC with US hyperscaler customers during calendar year 2026.
Currently, we are enabling all the major cable suppliers, all of which have begun initial qualification at multiple hyperscalers. As data center topology continues to evolve, we see copper remaining foundational elements to next-generation data center interconnect, particularly for short-reach links where its cost power efficiency, speed, and reliability are unmatched. With the bandwidth requirements increasing from 400 gig to 800 gig, 1.6, and beyond, advances in active copper technologies are extending the reach and offering significant power savings, making copper an essential complement to optical solutions. In high-performance computing and AI clusters, copper enables low latency, energy efficiency connections at a rack and row level where optics address longer reach needs.
By leveraging our twenty-plus years of experience in analog data center solutions, we are helping our customers achieve the performance, efficiency, and scalability demands of today's and tomorrow's data center with a comprehensive product portfolio addressing line speeds from 10 gig to 400 gig with a line count from one to eight channels. Moving forward, the momentum in fiber edge combined with our emerging copper edge and LPO opportunities all supported by the strong data center CapEx spending positions our data center business for strong growth. Now moving to our high-end consumer end market. Net sales for Q2 were $41.2 million, up 16% sequentially and up 11% year over year.
Net sales in consumer TVS were $29.9 million, up 22% exclusively and up 15% year over year, consistent with the seasonality associated with the smartphone unit ramps and our strong content across multiple customers. This growth exceeds overall growth in the handset volumes, aligning with our belief that Semtech is gaining content and market share, stemming from our market-leading performance and supply chain excellence. Designed for ultra-high capacitance sensitivity and fast response times, this device safeguards displays as well as price speed interfaces such as HDMI, USB, and display ports, without compromising signal integrity or performance. This makes them ideal for use in smart TVs, game consoles, laptops, wearables, and mobile devices.
Leading global consumer electronics brands integrate Semtech's TVS technology into their products to ensure device performance durability and unreliability. In addition, our per se sensing technology is being increasingly deployed across a growing range of applications from consumer electronics to automotive and industrial markets. In devices such as smartphones and laptop computers, where specific absorption rate standards are becoming more stringent, per se enables intelligent power management by detecting proximity and optimizing RF performance to meet regulatory requirements without compromising the user experience. In addition, Perseil enables precise gesture control with ultra-low power consumption, both of which are highly valued for wearables such as a headset and smart glasses.
We are actively engaged in design discussions with a broad range of customers in both smart glasses and smartphone platforms, supporting both existing designs and new launches over the coming quarters. Moving towards the industrial end market, Q2 industrial net sales were at $143 million, up slightly sequentially in line with our outlook and up 14% year over year. Within the industrial, net sales of LoRa-enabled solutions were $36.9 million, down 5% sequentially and up 29% year over year, supported by continued expansion across several end markets and in multiple applications. LoRa offers a unique combination of long-range connectivity, low power consumption, and robust in challenging environments.
Its ability to transmit data over several kilometers while operating for years on a single battery charge makes it ideal for predictive maintenance, asset tracking, energy management, and smart city infrastructure. It also enables cost-effective and secure monitoring and control of the equipment, infrastructure, and environmental conditions over large areas. We are seeing growth in applications in home security systems, smart appliances, pad and personal tractors, and community-based environmental sensors. In addition, our recent generation LoRa chips offer dual-band capability, 2.4 gigahertz and ISM frequencies, to enhance bandwidth. This capability is supporting a new generation of connected devices that require reliable low power communication without the complexity and the of traditional networks.
Building capability is facilitating LoRa's adoption in emerging low altitude economy, including drone delivery, aerial surveying, and emergency rescue. LoRa is especially well-suited for this environment, as it combines long-range communication, low power consumption, and strong signal resilience, three factors critical for aerial operations. LoRa technology is used to provide reliable telemetry and sensor data transmission even beyond the visual line of sight. This allows operators to gather real-time insights without relying solely on high bandwidth short-reach video links. Our IoT systems hardware business recorded Q2 net sales of $64.8 million, up 2% sequentially and up 24% year over year.
Bookings in our hardware business continue to be strong, over 40% year over year, due to both the broad market recovery as well as our position as a leading North American supplier. We see strong 5G momentum at the IoT transitions from 4G with a growth in both bookings and design wins. We believe we hold a leadership position with the 5G red cap and are progressing while we're launching Qualcomm-based platforms in the coming year. We continue to lead in 5G LPWA, advancing satellite IoTs to non-terrestrial network or NTN, which opens up new opportunities for global connectivity. For router and gateways, our partnership ecosystem continues gaining momentum.
As announced in June, several of our products, including our flagship XR 60, 5G router, achieved Verizon frontline verified status. We now support Verizon's frontline network slice, that dedicated 5G highway for the first responders. This opened up significant opportunities in public safety, where mission-critical connectivity is paramount. In July, we hosted an AirLink partner summit in Dallas, where we shared our product roadmap and showcased a range of compelling use cases in public safety, public transit, utility, oil and gas, as well as government applications. Our various partnerships represent fundamental steps as we evolve from a product vendor to a solution provider of choice for mission-critical applications.
In summary, we delivered another quarter of strong financial performance in Q2, reflecting both the strength of our core business and the disciplined execution of our strategy. At the same time, we continue to invest in our R&D, which will fuel future growth, ensuring our technology remains at the forefront of the market requirement and the customer expectations. With that, I will now turn the call to Mark for additional detail on our financial results and our outlook for 2026.
Mark Lin: Thank you, Hong. I am pleased to report that for Q2, net sales were a record $257.6 million, above the midpoint of our outlook, up 20% year over year, and the sixth consecutive quarter of growth. Net sales trends by end market, reportable segment, and geographic region are included on slide 16 of the earnings presentation. Adjusted gross margin was 53.2%, down 30 basis points sequentially and up 280 basis points year over year, and above the midpoint of our outlook. Semiconductor products adjusted gross margin was 60.7%, down sequentially from 63.7% and up year over year from 59.2%.
Looking at the adjusted gross margin dynamics in more detail, high-end consumer sales were seasonally higher in Q2, which has a modest negative impact on product mix. Product mix within Signal Integrity was impacted by higher sales of telecommunications products as well as a forecasted decline in corporate revenue. IoT Systems and Connectivity adjusted gross margin benefited from higher sales of routers and gateways, with Q2 at 39.5% improving sequentially from 34.4% and up year over year from 35.4%. Adjusted net operating expenses were $88.4 million within our guidance range. Adjusted operating income was $48.6 million, resulting in an adjusted operating margin of 18.8%, up 460 basis points year over year.
Adjusted EBITDA was $56.5 million, up 39% year over year, and adjusted EBITDA margin was 21.9%, up 310 basis points year over year. Adjusted net interest expense was $4.1 million, down 80% year over year. Annualizing the Q2 amount, adjusted net interest expense is well under a single quarter's expense from just a year ago. This has allowed us to accelerate investment in strategic, high-growth areas of our business, while driving earnings growth and cash flow. Q2 adjusted net interest expense decreased sequentially from $5 million, reflective of our continued prioritization of using free cash flow to repay debt. Other net non-operating expenses were $1.3 million, primarily from foreign exchange revaluation losses reflective of a weaker U.S.
Dollar during the quarter. We recorded adjusted diluted earnings per share of $0.41, up from $0.38 in Q1, and a substantial improvement from $0.11 recorded a year ago. In the second quarter, we recorded a noncash $41.9 million goodwill impairment charge from our connected services business that is reflected in our GAAP results. While net sales for this business remained stable, down 1% year over year and up 3% sequentially, these results did not meet our internal earnings forecast and resulted in a reassessment of this business' goodwill balance. Operating cash flow for Q2 was $44.4 million, sequentially up 60% from $27.8 million and up from negative $5 million a year ago.
Free cash flow for Q2 reflected similar growth at $41.5 million, sequentially up 59% from CAD 26.2 million, and up from negative $8.4 million a year ago. We ended Q2 with a cash and cash equivalents balance of $168.6 million, up $12.1 million from Q1 while making optional principal prepayments of $25 million on our term loan. At the end of Q2, net debt sequentially decreased $37.1 million to $359.1 million. Along with debt reduction, strong business performance contributed to an adjusted debt leverage ratio of 1.6 as of the close of Q2, sequentially from 1.9 and down year over year from 8.8. Now turning to our third quarter outlook.
We currently expect net sales of $266 million, plus or minus $5 million, up 12% year over year at the midpoint. We expect net sales from an infrastructure end market to increase sequentially, including growth in data center. We expect net sales from our high-end consumer end market to be up, reflective of typical seasonality and content gains. We expect net sales from an industrial end market to be slightly up, with LoRa about flat sequentially combined with growth in our IoT cellular business. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 53%, plus or minus 50 basis points, a 60 basis point improvement year over year at the midpoint.
Adjusted net operating expenses are expected to be $88.8 million, plus or minus $1 million, resulting in an adjusted operating margin at the midpoint of 19.6%, a 130 basis point improvement year over year. Adjusted EBITDA is expected to be $60 million, plus or minus $3 million, resulting in an adjusted EBITDA margin at the midpoint of 22.5%, a 90 basis point improvement year over year. We expect adjusted interest and other expense net to be $5 million, benefiting from leverage-based pricing on a term loan that aligns a lower interest rate to a lower leverage ratio. We expect an adjusted normalized income tax rate of 15%, consistent with Q2.
These amounts are expected to result in adjusted diluted earnings per share of $0.44, plus or minus $0.03, based on a weighted average share count of 91.6 million shares.
Mitch Haws: Thank you, Mark. We can now turn the call back over to the operator for the question and answer session.
Operator: Thank you. With that, we will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. And our first question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.
Harsh Kumar: First of all, congratulations on very solid, very steady results. Hong, I did have a question on LPO opportunity and the timing for it. Not too long ago, a competitor sort of suggested that timing may be imminent, that they were basically in commercial production. I was curious if you're talking about the fourth quarter. So I was curious about how you see the progression through the year. Is there a possibility that LPO could be preponed? Maybe it could come earlier. Or are you just in different sort of customers and maybe with a different slightly different timeline?
Hong Hou: Harsh, thank you for the question. Yes. The LPO we have been engaged with a broader customer base. For applications, you know, for CSPs in the US and in China. And they are at a different stage of testing and qualification. But one thing is good that our TIAs had been in pretty much every transceiver manufacturer's design and qualification. As for timing, you know, some of them will start deploying in Q4 and some I wouldn't say the imminent right now is the small volume. And because we have a broad product portfolio, and our TIA has already been designed in a DSP-based real-time solution already. We don't see the incrementally higher demand due to the LPO just yet.
But we do expect that Q4, they will start deploying. So we have the design wins in 800 gig and also 400 gig for DR4s. And that one is more may already start in a volume.
Harsh Kumar: Understood, Hong. And then maybe I could ask you about the general state of the data center spend. You're a set of a networking player. You have parts and modules and cables. You talk to, obviously, a lot of large companies. You know, I was curious. I wanted to see where your level of enthusiasm is on the continued data center spend. These days as you talk to these large hyperscalers and the large networking players?
Hong Hou: Yeah. Thank you for that question. Yes. We do engage with our direct customers, which are the module manufacturers, but we also engage with the CSPs in the US and also in China. We all read the same news and earnings report the CSPs, they have strong conviction and forecast to increase the CapEx spending to expand the data center capacity and upgrade for the AI capability. And we're seeing this from our direct customers, a very strong forecast for 2026 and beyond. So we would be benefiting from this tremendous backdrop.
On the other hand, in China, the CSPs, as I discussed in the prepared remarks, the first part of the Q2, they tend to be a little bit cautious due to the limit to the GPU availability. But in the last several weeks, they have come back, the booking activity has improved pretty significantly. And the forecast for the remaining of 2025 and 2026 is very optimistic as well. So we see the market really has a very optimistic tone, and we're seeing the results from the new business opportunities and the booking. And, because we are supplying electronic components, you may hear some pockets, they were limited by so EML or other components. But it's not for us.
Our PMD, physical media devices, designed to support the VCSELs, support EML, and also support silicon photonics modulators. So we don't see the constraint at this point, but we do plan ahead to add more testers and back-end OSAT capacity in anticipation of a pretty significant ramp for 2026 and beyond.
Harsh Kumar: Understood, Hong. Thank you so much.
Hong Hou: Thank you.
Operator: Thank you. And our next question comes from the line of Joseph Moore with Morgan Stanley. Please proceed with your question.
Joseph Moore: Great. Thank you. You talked about your outlook for Copper Edge. Can you give us a little bit more color? How confident are you in seeing broader adoption? And when you talked about hyperscale customers, what types of projects are you working on there? Thank you.
Hong Hou: Yeah. Thank you, Joe. Yeah. So we have been talking to customers over the last three, four quarters, and we covered a pretty broad ground to have been engaging with over 20 customers in the entire ecosystem. So, certainly, the awareness level right now has significantly increased. And we work with our cable customers very closely. The four or five key ones, they all have a 100 gig per lane or 800 gig cables. And 200 gig per lane or 1.6 T cables is sampled to different CS and enterprise customers. We see strong traction. They definitely see the advantage of low power, more flexible, and higher in signal integrity. A longer reach than DAC cable.
And they are designed in one case for scale-up similar to our Android customer. To interconnect the different processors ASICs in one cluster. And avoid more applications in scale-out. To interconnect, say, from the servers to the top of the rack. And, also, it served at the backplane, to replace the deck cables. So, you know, we see the use cases. You replace the DAC cable. We see the use cases to replace AEC's. And all of these applications are to take advantage of the unique property, like low power consumption, high signal integrity, and extended reach compared to the DAC.
We also have customers use the leader equalizers for onboard applications to improve the signal integrity and stretch the reach from the ASIC to, say, front of the panel or pluggable ports. So we'll see probably a couple of hyperscalers to drive to the high volume ramp first. In either Q4 or 2026. For 1.6 TEE cables, the timing of ramp, you know, will coincide with a switch. If you don't have 200 gig port, you don't really need a connectivity to connect the ports. But for 800 gig, or a 100 gig per lane cables, we start seeing some of the demand and getting preparation for the latter part of this year.
Joseph Moore: Great. Thank you for that. And then separately, are you seeing any supply constraints on 1.6 optics?
Hong Hou: The 1.6 optics, Joe, at this point, we don't see the strong volume demand yet. But every module manufacturer is designing their optical module using different DS, using different PMDs, which we provide, you know, their customers. They all require different pitches and different configuration for packaging. We support a wide range of demand. But the volume ramp is gonna be, like, in 2026. At this point, the ports would require 1.6 T connectivities. They're only two from two major ASIC manufacturers. One is making GPU. One's making switches. So you can imagine the timing of when they start the volume deployment.
Joseph Moore: Great. Thank you.
Hong Hou: So the bottom line, we don't see the constraint from outside.
Joseph Moore: Thank you.
Operator: Thank you. And the next question comes from Timothy Arcuri with UBS. Please proceed with your question.
Timothy Arcuri: Hi. This is Dino on for Tim. So just a question on LoRa. It looks like results came in strong ahead of the $30 million to $35 million range you previously mentioned. Are you seeing significant contributions from other applications of LoRa? And do you expect to see LoRa performing at the same level in the next few quarters?
Hong Hou: Yes. Thank you for the question. That's a great question. Certainly, we are very pleased about the demand of LoRa. I think we are on the right track in providing enhanced capability by the new product. For example, the dual band in addition to ISM baseband, we provide the device capability to run on 2.4 gigahertz band as well. What that does is to provide enhanced bandwidth data rate. But at a trade-off a transmission distance, but LoRa can already cover hundreds of kilometers. It's not a big trade-off. And by increasing the bandwidth, we unlocked a range of applications. For example, the low altitude economy, drone deliveries, and some even some applications related to HII.
For example, parking meters, and they can get a still picture snap and using the enhancement with to transmit the pictures back in at that archive. So we also had the LoRa plus that basically LoRa plus other RF protocols. By combination, you can address different applications that traditionally LoRa alone cannot address. This new technology has really opened up new market opportunities. We are very pleased to see that the LoRa continues to have very strong demand. We did mention that. As a matter of fact, the end node number of end node was shipped last quarter, it's a historic record. So going forward, we think right now gives us confidence and conviction.
We expect the LoRa revenue on a quarterly basis to be between $30 million to $40 million. You know? So certainly, it's gonna be an increase from our original belief from 30 to 35.
Timothy Arcuri: Great. Thank you.
Hong Hou: Thank you.
Operator: And our next question comes from the line of Quinn Bolton with Needham and Company. Please proceed with your question.
Quinn Bolton: Hey, guys. Thanks for taking my questions. Congratulations on results and outlook. I guess I wanted to follow-up on the ECC opportunity just to understand timing. It sounds like you still expect Tong some ACC revenue potentially in the fiscal fourth quarter ending January. And if I heard your answer to the previous question, it sounds like 800 gig or a 100 gig per lane ACC potentially for scale-up is the first application to ramp.
Hong Hou: So, Quinn, that may confuse you that for 800 gig, it's for the interconnect, yeah. Be in the backplane and they're also between racks. Historically, they use a very that deck cable. They can reach the data rate of a 100 gigabit even 200 gigabit per lane. But the cable was a 26 gauge, very rigid. You know, using their words in, like, as rigid as a rod. So when you bend a little bit, you compromise the signal integrity. So in that, they will still call the scale-out applications for different, you know, to make the different switches. But right now, the one we designed in, for 200 gig per lane and 1.6 application is a scale-up.
Between different racks for ASICs. And the customer is finding more applications in scale-out, to you know, in the backplane to generate, say, for example, from the neck cart to the top of the rack. And in many cases, they within the topology of the switch fabric, they are just replacing the deck cable with ACC because of the flexibility, better signal integrity, incrementally higher power than DAC cable but it's not really taking out any additional power budget.
Quinn Bolton: Okay. I guess, Hong, just so I'm clear, the 1.6 or 200 gig per lane cables, I thought a lot of those would depend on Broadcom's Tomahawk six switch that enable 200 gig per lane. So are there applications for 1.6 T ACCs that ramp before availability of that switch, or do your 100 gig designs ramp, you know, in the fourth quarter, before availability of that Ethernet switch platform from Broadcom?
Hong Hou: Right. So the volume demand will start from 100 gig first per lane, I would say, in Q4. And then the 200 gig first applications to volume is gonna be the scale-up between ASICs. Then that will be followed by 200 gig per lane scale-out application as you correctly pointed out. When the switch die are more available in volume. And you need to be interconnecting. Between the NIC card to the top of the rack.
Quinn Bolton: Got it. Okay. That makes sense. And then I wanted to switch. I know the data center business is driving a lot of growth, but you mentioned the per se business, and engagements in sort of new smart glass platforms as well as smartphone platforms. I'm just wondering if you could give us your outlook for the ramp of per se. I think you've got a smart glass platform that you're on today that's already achieved high volume. Do you see continued growth in smart glasses? And any kind you can make on per se adoption in the smartphone segment would be helpful. Thanks, Hong.
Hong Hou: Yeah. Thank you. Yeah. So, Quinn, per se devices have been the industry standard for smartphones. And you know that for almost all the smartphone manufacturers, we're there, we're in the process of getting into the last one and the major one. As for the applications in the smart variable, the smart glasses certainly are lead customer is this matter Rebound glasses. And there are several other platforms. They use basically the same functionality, but they do the different ways and link to their own large language model for AI applications. And we are there. And the smart wearable continues to evolve. And demand more functionalities, so we are engaging with this broad range of customers in designing next generations.
So that's the next generation product. So that is the area we feel like it can evolve into a pretty sizable market. And we're in the forefront of it.
Quinn Bolton: Excellent. Thank you, Hong. Thank you, Mark.
Hong Hou: Thanks, Victor.
Operator: Thank you. And our next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed with your question.
Christopher Rolland: Hi, guys. Thanks for the question. So I do know it might be a little early for January guidance. But, seasonally, I do believe historically, that's been down. Is there a wide way or broad way to think about kind of how seasonality or how we should think about January, like, could you outgrow typical seasonality given the LP ramp or the ACC ramp? Just any broad kind of milestones or things to think about for January.
Mark Lin: Yeah, Chris. So we provided our outlook for Q3 and our end market commentary should help investors formulate thoughts for growth in the out periods. You're correct, high-end consumer sales do trail down in Q4. We don't really see a change to that particular trend. High consumer net sales were $41.2 million in Q2. A multiyear high. Up 16% sequentially. Up 11% year over year. So while we're gaining design wins and market share, which allows us to grow above market rates, I still view Q4 as just a seasonally trail down, not a weakness at all in any of the business. Our industrial end market is performing well. We've heard some from some industry bellwethers on these trends.
ISC business is performing well, you know, for the GS to 5GS transition as a tailwind there. And in infrastructure, data centers is definitely a growth engine. All the commentary that Hong has provided in our prepared remarks and for the Q&A up until now, we do have a very broad portfolio. FiberEdge shipments were up about three times compared to a year ago. And anything that we talk about in terms of LPO would be incremental, and ACC is definitely incremental to that ramp.
Christopher Rolland: That's fantastic. Thank you so much. Maybe for my second question, I think you guys said you were down to 1.6 times leverage. Pretty incredible from where you guys were just a couple of years ago. But my specific question is what does this mean for the odds of doing a potential acquisition and or what does this mean for the odds for doing a potential divestiture?
Hong Hou: Thanks. Yeah. So, Chris, you know, that's definitely where we're pretty excited about the progress we have made, not a couple of years ago, as recent as a year ago, our leverage ratio was at 8.8 x. So, certainly, that's a huge improvement. This improved financial foundation allows us to go more aggressive in capturing the opportunities of growth. Through close engagement with the customers, we have identified many great growth opportunities, and we have been able to balance the R&D spending with our bottom line over the last year. And I think we are striking the right balance and we're increasing R&D spending in a core area by 20% sequentially while still maintaining, delivering the good bottom line performance.
Going forward, continue to invest in the core areas. And there might be some opportunities when we analyze our portfolio. We're seeing we can apply, you know, technology leverage, customer leverage, or operational leverage. We see in some void we have some capability to do small tuck-ins. But, you know, the highest priority for us is the portfolio optimization. We decide, you know, what the areas we wanted to get in. We have the board support to continue the strategy going forward. So, hopefully, that's answered your question. And we definitely the core and non-core delineation is not just a paper exercise. It's really a north star to set the priority for us.
Christopher Rolland: Thanks, Hong, and congrats on the results.
Hong Hou: Thank you.
Operator: And our next question comes from the line of Rich Schafer with Oppenheimer. Please proceed with your question.
Rich Schafer: Yeah. Thanks. Thanks, Tom. I've got a question on Tri Edge. I'm just curious what the outlook, you know, is for the PAM4, the Tri Edge business. As the industry sort of seems to be focusing more on 100 G and 200 G lanes and, you know, I guess, how do you, you know, what are your plans for that business? How do you view that Tri Edge opportunity? I mean, is PAM4 gonna be a growth driver for Semtech?
Hong Hou: Rich, thank you for your great question. So the Tri Edge has been our traditional offering. It's basically an integrated product with the drivers and TIAs integrated with a clock and data recovery one. So you can almost say it's oxymoron that analog version of the DSP. We offered our product at a 50 gig per line to give, say, four channel will be 200 gig aggregated bandwidth. And if this is eight channel, will be 400 gig aggregated bandwidth. So our customers, more particularly in China, and also one of the CSPs in the US, has been using our Tri Edge in the AOC cables. Active optical cables, for 400 gig, and 200 gig.
So that has been going on, you know, on a limited basis, but one big CSPs in the US are giving us a forecast and start ramping up by using the Tri Edge in the AOC application for 400 gig. So our plan is that we'll continue to push that envelope to make the PAM4 fifty gig move up to 200 gig. Gonna be skipping a 100 gig PAM4. Because this is a little too late for that. The beauty of the 200 gig Tri Edge CDR based is gonna be continue to deliver low power consumption and had the advantage of both equalizing in the frequency domain and retiming in the time domain.
So that is on our roadmap and under development. We believe when the 1.6 transceivers are launched, and very next thing, you know, there will be first driving for volume and then later on driving for cost reduction and the power reduction. So we will catch that wave of providing low cost, low power version of the Tri Edge.
Rich Schafer: And, Hong, have you taken a swing at sort of what that opportunity looks like in any sense of how big that market could be, or is it just too early?
Hong Hou: So, Rich, right now, it's a little early to do that. But we will be basically using when we were evaluating market opportunity in order to determine if this is a viable R&D project. We just make that assumption. Say, for example, if we can chip away to 10% of 1.6 T transceiver market from the real-time solutions, that will be well worth a while for, you know, the market opportunity. It's really, really, really great for as an alternative to the DSPs. So I think, you know, it's gonna be as customers seeing a better signal integrity, lower power performance, again, just like the LPO, gonna be more acceptance.
And because of the low power is a key attribute to the optical connectivity in the future.
Rich Schafer: Great. Thanks a lot.
Hong Hou: Thank you.
Operator: Thank you. And our next question comes from the line of Cody Acree with The Benchmark Company. Please proceed with your question.
Cody Acree: Yeah. Thanks for taking my questions, and congrats on the progress. Hong, can you just go back to your ACC commentary on the cloud service providers? You mentioned expecting that to begin early 2026. Is that any reset of timing from earlier expectation of diversification in Q4? Or was that always the case, the delineation between CSPs and the cable providers?
Hong Hou: Cody, thank you for the question. So we are always at the timing wise for the loliprant. It's gonna be going through the platform architecture. The platform architecture of our customers will go with the appliance they need in there. For example, in this case, the switch timing of the switch availability, as you probably know and heard, is gonna be pushed out a little bit. So that is the one thing we found, you know, during Q2. But as I said, there are two other use cases example, 100 gig per lane, 800 gig ACC cable. That's independent of that timing. We believe that ramp will start in Q4 for that flavor.
Another one is a 200 gig per line and 1.6 T cable for scale-up between different racks of ASICs. That will also march along the timeline in Q4. So when you start ramping back, you know, from very low level to a pretty sizable level, the timing does matter a lot. Because its ramp-up slope is pretty high. The good thing is that we have gone through the type of ramp in the past in supporting the anchor customer. We have the confidence that we'll be able to support the market adequately.
Cody Acree: Excellent. Thanks for that. And, Mark, can you give us any of your outlook on your gross margin expectations for the next couple of quarters and also your OpEx spending trends?
Mark Lin: Yeah. So we have the guide for the following quarter. And really, as we've stated, we're very mix-driven. But the good part is there, Cody, is that the strong, the faster-growing portion of our business are accretive to mix, especially within data center. But that said, you know, we also provide the areas of growth for our IoT cellular business, which is, you know, a little bit of a headwind. And also within Q3, you know, we do have a little bit of a headwind from high-end consumer. But overall, that particular business does support the industrial TVS business as well, which has pretty good gross margin. So overall, pretty good operating margin. But again, mix-driven.
OpEx, I think our commentary is that, you know, we do look at opportunities to invest in near-term growth areas. We have a pretty strong portfolio that we're developing, but we are very cognizant of R&D spend. And, you know, we'll try to keep that under, we I should say we expect to keep that under control. But again, there's some really, really great opportunities out there for us to invest in some very good organic growth opportunities.
Cody Acree: So any thoughts on R&D growth as you go forward?
Mark Lin: Cody, so we've got it out that one quarter. You can just expect us to be prudent and not overspend. And maybe we'll just leave it at that.
Cody Acree: Okay. Thank you, guys.
Operator: Thank you. And our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.
Tore Svanberg: Yes. Thank you, Hong, Mark. I wanted to just take a step back and ask about sort of the general business environment from a linearity perspective. Is there sort of any color you could share with us on linearity of sales and especially on bookings?
Hong Hou: Yeah. So Tore, thank you for your question. So we are seeing pretty strong booking activities, data center area, LoRa in Perth se, even the consumer high-end consumer TVS. Is very strong. The industrial for the modules, we have the tailwind. The booking activity is very strong. So as for the linearity, from quarter to quarter, you always have this different product mix thing. But I will say, you know, very rarely, you have a few things all seem to be lining up in supporting a very positive momentum, and that is now. And I feel really good about the future quarters.
Tore Svanberg: Very good. And as my follow-up, I just sort of clarification question on LPO. So you said, you expect three leading hyperscalers to be in 800 gig production in Q4 of this year. Are those three hyperscalers all US? Or is that US and China?
Hong Hou: So three hyperscalers, two are in the US and one in China. So, first, the LPO, this is really this is early inning. And the LPO transition into taking over some of the DSP-based transceiver market share is inevitable. And the beauty for that for us is, you know, if it stays with the DSP-based, we have TIA content. If transitioned over to LPO-based, our SAM is gonna be doubled. You know, we will have the driver content as well. So the timing, to us, is important, but it's not as super sensitive because we are already an incumbent for DSP-based transceivers.
Tore Svanberg: Sounds good, and congrats on the results.
Hong Hou: Thank you.
Operator: Thank you. And our final question comes from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.
Craig Ellis: Thanks for sneaking me in, guys. Hong, I wanted to go back to the opening part of your prepared comments where you talked about things accomplished in your first year. But really use that as an opportunity to ask you what you would like to see the business accomplish in your second year, especially as you look at the infrastructure business from where you are today. What would you be happy with the business accomplishing over the next four quarters, either from a product standpoint, a scale-up standpoint, etcetera? Just some qualitative color on where we would be from where we are would be really helpful. Thank you.
Hong Hou: Thank you, Craig. If I say largely broad brush, the second year because of better improved financial foundations, we can go more aggressive. And the first year, even some of the opportunities we uncovered, but we have to balance the bottom line with the investment in R&D. And so that's one thing. The second thing is some of the R&D spending we have in the first year is gonna start showing the results and momentum for the second year. So I don't want it to miss again. If the first year, we play some catch-up game, the second year, I wanted to be outright lead the market with the solutions out there.
Craig Ellis: Got it. And they should look at the breadth of the business, Hong, or the strength of the business across its different product groups, whether it be, you know, CopperEdge, FiberEdge, etcetera, any significant evolutions we be looking at that you're trying to drive?
Hong Hou: I think what we focus instead of focusing on each product line, and we fortunately have a broader portfolio. We focus on one simple principle. With the market needs higher bandwidth, lower power, lower latency, and lower cost. That entire offering of our portfolio is focused on the very fundamental attributes we can offer to the customers.
Craig Ellis: Thanks, Hong.
Hong Hou: Thank you.
Operator: Thank you. With that, there are no further questions at this time. I would like to turn the call back to Mitch Haws for closing remarks.
Mitch Haws: That concludes today's call. Thanks to all of you for joining us today. And we look forward to seeing you at various investor events over the coming weeks.
Operator: Thank you. And with that, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.